Warren Buffett ETF Portfolio (90/10) – Performance Video, Returns Analysis

In a 2013 letter to Berkshire Hathaway investors, Buffett noted that, upon his passing, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fund and 10% into short-term government bonds. This is what is now known as the “Warren Buffet ETF Portfolio (90/10). Let’s find out what the strategy means.

The Warren Buffett ETF Portfolio (90/10) refers to a strategy of investing 90% of funds in low-cost, passively managed S&P 500 index ETFs and 10% in government bonds. This approach is based on the investment philosophy of Warren Buffett, who is known for his belief in passive investing and avoiding high-cost, actively managed funds. The strategy aims to provide long-term growth with reduced risk and lower fees compared to actively managed portfolios.

In this post, we take a look at the Warren Buffett ETF Portfolio (90/10), and we end the article with a backtest to determine performance and returns. You will also find a video of this article at the bottom.

Warren Buffett ETF Portfolio: Overview

The Warren Buffett ETF Portfolio (90/10) is an investment strategy inspired by the investment philosophy of Warren Buffett, the legendary investor and CEO of Berkshire Hathaway. The strategy involves allocating 90% of the portfolio to low-cost, passively managed S&P 500 index ETFs, and 10% to government bonds. The purpose of this strategy is to provide long-term growth with reduced risk and lower fees compared to actively managed portfolios.

The S&P 500 index tracks the performance of the 500 largest publicly traded companies in the United States and has historically delivered a high return over long periods of time. By investing in an S&P 500 ETF, an investor is essentially investing in a diversified portfolio of blue-chip companies that have a proven track record of stability and growth.

The 10% allocation to government bonds provides a cushion against market volatility and helps to mitigate the risk in the portfolio. Bonds are considered to be less volatile than stocks, and government bonds are considered to be the safest form of debt due to the backing of the government.

Overall, the Warren Buffett ETF Portfolio (90/10) aims to provide a simple and cost-effective investment strategy for those looking for long-term growth. Investors can use this portfolio to take advantage of the benefits of passive investing and reduce the risk of underperforming the market.

Warren Buffett ETF Investment Strategy

The Warren Buffett ETF Investment Strategy is a passive investment approach inspired by the philosophy of Warren Buffett. It involves investing in low-cost, passively managed exchange-traded funds (ETFs) that track the performance of major stock market indices, such as the S&P 500.

The strategy typically involves allocating a large portion of the portfolio, often 90%, to S&P 500 index ETFs and the remaining 10% to low-risk fixed-income securities, such as government bonds. It is a straightforward approach to investing that is designed to help achieve long-term growth while avoiding the pitfalls of overactive trading and high fees.

The key principle behind this strategy is to focus on long-term investing and avoid attempting to time the market or make short-term trades. By investing in passively managed ETFs, the strategy seeks to capture the overall performance of the market, which has historically delivered strong returns over time.

In addition, the strategy aims to reduce investment costs by avoiding actively managed funds with high fees, which can significantly eat into returns over the long term. By focusing on low-cost ETFs and a diversified portfolio, this strategy aims to help investors achieve their financial goals while minimizing risk.

90/10 ETF Portfolio Allocation

The 90/10 ETF Portfolio Allocation is a popular investment strategy that involves dividing the portfolio into two components: 90% invested in low-cost exchange-traded funds (ETFs) that track major stock market indices, such as the S&P 500, and 10% invested in low-risk fixed-income securities, such as government bonds. The goal of this allocation is to achieve a balance between growth and risk management.

The 90% allocation to ETFs provides exposure to a broad range of equities, which have historically delivered strong returns over long periods of time. By investing in passively managed S&P 500 index ETF, such as the Vanguard S&P 500 ETF (VOO) or the iShares Core S&P 500 ETF (IVV), the investor is able to capture the overall performance of the stock market without having to make individual stock picks.

The 10% allocation to a short-term U.S. Treasury bond, such as the Vanguard Short-Term Treasury ETF (VGSH) or the iShares 1-3 Year Treasury Bond ETF (SHY), provides a cushion against market volatility and helps to mitigate risk in the portfolio. These government bond funds are considered to be among the safest forms of debt due to their backing by the government.

Related reading: Warren Buffett Investment Strategy

Investing with Warren Buffett ETFs

Investing with Warren Buffett ETFs can be a simple and cost-effective way to achieve long-term growth. Here are the steps to get started:

  • Determine your investment goals: Decide on your financial goals, risk tolerance, and time horizon. This will help determine the right mix of ETFs to include in your portfolio.
  • Choose low-cost ETFs: Select ETFs that track the S&P 500 and focus on passively managed funds with low fees and high liquidity. You can spread your investment across multiple ETFs to reduce risk and increase diversification.
  • Allocate a portion to fixed-income securities: To reduce risk and balance your portfolio, consider allocating a portion of your portfolio, such as 10%, to low-risk fixed-income securities, such as government bonds.
  • Consider dollar-cost averaging: Invest regularly in your ETFs to take advantage of dollar-cost averaging and smooth out market fluctuations.
  • Monitor your portfolio regularly: Review your portfolio periodically to ensure it remains aligned with your goals and make adjustments as needed.

Warren Buffett ETF Portfolio Performance

The performance of the Warren Buffett ETF Portfolio has been generally positive over long-term horizons. Its equity curve has closely followed that of the S&P 500 index, with a little less drawdown, as you can see in the table and chart image below:

However, it’s important to note that the past performance of the stock market is not indicative of future results, and investing always carries some level of risk. The performance of the Warren Buffett ETF Portfolio can be impacted by various factors, including market conditions, changes in the economy, and geopolitical events.

Building a Warren Buffett ETF Portfolio

Here are the steps to build a Warren Buffett ETF Portfolio:

  • Select the low-cost ETFs you want: Choose index ETFs that track the S&P 500 that are passively managed funds with low fees. Good examples include the Vanguard S&P 500 ETF (VOO) or the iShares Core S&P 500 ETF (IVV).
  • Choose low-cost bond funds: Choose a bond fund that invests in short-term U.S. Treasury bonds, such as the Vanguard Short-Term Treasury ETF (VGSH) or the iShares 1-3 Year Treasury Bond ETF (SHY).
  • Allocate funds: Invest 90% of your capital in the S&P 500 index funds and 10% in the bond funds.
  • Implement dollar-cost averaging: You can invest regularly in your ETFs to take advantage of dollar-cost averaging and smooth out market fluctuations.
  • Monitor your portfolio and rebalance accordingly: Review your portfolio periodically to ensure it remains aligned with your target allocation and adjust as needed.

Best Warren Buffett ETF Portfolio

The best Warren Buffett ETF portfolio will depend on an individual’s specific financial goals, risk tolerance, and time horizon. However, a typical Warren Buffett-style ETF portfolio would include low-cost, passively managed ETFs that track major stock market indices, such as the S&P 500.

With 90% invested in S&P 500 index ETFs and 10% invested in short-term US Treasury bond ETFs, the portfolio aims to get most of the S&P 500 returns while using short-term bonds as a way to store cash for temporary uses. When choosing ETFs for a Warren Buffett ETF portfolio, it’s important to focus on passively managed funds with low fees and to consider factors such as historical performance, expense ratios, and liquidity.

However, past performance is not indicative of future results, and investing always carries some level of risk. Before making any investment decisions, it may be wise to consult a financial advisor who can help determine the best ETF portfolio for your individual circumstances.Top of Form

Warren Buffett ETF Portfolio for Beginners

Warren Buffett ETF Portfolio is a popular investment strategy for beginners, given its simplicity, low cost, and potential for good returns. Focusing on low-cost, passively managed ETFs that track the S&P 500 and short-term Treasury bonds, the goal of this strategy is to minimize risk and maximize long-term growth through a well-diversified portfolio.

Building a Warren Buffett ETF Portfolio is straightforward and can be done with a limited amount of knowledge about the stock market. The key is to allocate 90% of the capital to low-cost ETFs that track the S&P 500 index and invest the remaining 10% in low-risk U.S. Treasury bonds.

Beginners can implement dollar-cost averaging by investing a certain amount regularly in their chosen ETFs. This can help smooth out market fluctuations and reduce the impact of short-term market swings. However, note that investing always carries some level of risk. Before making any investment decisions, it is advisable to consult a financial advisor who can help determine the best ETF portfolio for your individual circumstances.

Benefits of Investing with Warren Buffett ETFs

Investing with Warren Buffett ETFs can provide several benefits, including:

  • Low costs: By investing in passively managed ETFs, investors can minimize their investment costs and keep more of their returns.
  • Diversification: There is diversification across different stocks and market sectors, and the 10% in bonds also offers a bit of asset class diversification.
  • Access to the stock market: ETFs provide investors with an easy and convenient way to invest in the stock market and benefit from long-term growth.
  • Convenience: ETFs can be bought and sold on stock exchanges just like individual stocks, making it easy for investors to manage their portfolios.
  • Potential for long-term growth: It offers nearly the returns of the S&P 500 index.
  • Low-risk option: Allocating a portion of your portfolio, such as 10%, to low-risk government bonds can help reduce risk and balance your portfolio.

Strategies for Building a Warren Buffett ETF Portfolio

When building a Warren Buffett ETF portfolio, you can either choose to make a one-time investment or use dollar-cost averaging to build your portfolio over time.

For a one-time investment, you can make a huge lump investment, allocating 90% of the capital to S&P 500 index ETFs and 10% to U.S. Treasury bond funds. This strategy is best suited for investors who have a lump sum of money and want to invest it in one go.

With dollar-cost averaging, you invest a set amount of money at regular intervals, regardless of market conditions. Over time, you end up buying more units of ETFs when prices are low and fewer units when prices are high, potentially reducing the average cost per unit. This strategy is best suited for investors who have a regular savings plan and want to gradually build their portfolio over time.

What is the Ideal Asset Allocation for a Warren Buffett ETF Portfolio?

The ideal asset allocation for a Warren Buffett ETF portfolio will depend on an individual’s investment goals, risk tolerance, and time horizon. However, a common starting point for the Warren Buffett ETF portfolio is a 90/10 allocation, which is what Warren Buffett mentioned in his 2013 letter to shareholders. This implies investing 90% of the portfolio in low-cost, passively managed S&P 500 index ETFs and 10% of the portfolio in low-risk fixed-income securities, such as U.S. government bond ETFs.

This allocation provides exposure to the stock market and its potential for long-term growth while also offering some protection against market volatility through the fixed-income component. As the portfolio ages, it may be necessary to adjust the allocation to maintain the desired level of risk.

What are the Risks Associated with Investing in Warren Buffett ETFs?

Investing in Warren Buffett ETFs, like any investment, carries certain risks. Some of the risks associated with investing in Warren Buffett ETFs include:

  • Market risk: ETFs are subject to market fluctuations, and the value of the portfolio can decrease if the stock market performs poorly.
  • Credit risk: Bond ETFs carry credit risk, meaning the issuer of the bond may default on interest payments or repayments of principal.
  • Liquidity risk: Some ETFs may not have a large trading volume, making it difficult to buy or sell units at the desired price.
  • ETF issuer risk: The performance of an ETF is directly tied to the performance of its underlying assets. But if the issuer of the ETF does not effectively manage the underlying assets, the ETF’s performance could suffer.

What are the Tax Implications of Investing in Warren Buffett ETFs?

Investing in Warren Buffett ETFs, like other investments, can have tax implications. Capital gains from the sale of ETFs are taxed at the federal and state level, and dividends received from ETFs may also be taxed. The specific tax implications will depend on an individual’s tax bracket, the type of ETFs they invest in, the type of account used for the investment, and how long the investment was held. It is advisable to consult a tax professional for personalized advice.

How Can You Maximize Returns with a Warren Buffett ETF Portfolio?

Here are a few ways to maximize returns with a Warren Buffett ETF portfolio:

  • Choosing a different set of ETFs: Investing total stock market ETFs, such as the Vanguard Total Stock Market ETF (VTI) or the iShares Core S&P Total U.S. Stock Market ETF, rather than S&P 500 index ETFs may improve returns. This is especially true if it is combined with long-term bonds, such as the Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT), rather than short-term bonds.
  • Having a long-term focus: Invest for the long-term and avoid making emotional decisions based on short-term market fluctuations.
  • Regular rebalancing: Regularly review and adjust the portfolio to maintain the desired level of risk and ensure that it remains aligned with investment goals.
  • Avoiding market timing: Not trying to predict market movements by buying or selling based on short-term market trends. Instead, stick to a disciplined investment strategy.
  • Tax optimization: Consider tax implications when making investment decisions and consider tax-efficient investment options, such as tax-advantaged accounts, to minimize tax liability.

Warren Buffett ETF Portfolio (90/10) backtest

Let’s backtest Warren Buffet’s 90/10 portfolio. We’ll make three different backtests using different ETFs:

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We make three different backtests to show how the maturity of the bonds makes a difference. As a rule of thumb, the longer the maturity, the more risk. However, you should get compensated in the long run for taking this added risk.

Let’s see how our three different portfolios performed:

Warren Buffett ETF Portfolio (90/10) backtest 1: SPY and SHY

Let’s start with SPY and SHY:

Warren Buffett ETF Portfolio 90/10

The red line shows SPY (buy and hold), while the blue line is 10% allocated to SHY and 90% to SPY. As expected, it performs slightly worse compared to SPY:

90% SPY and 10% SHYBuy and hold SPY
CAGR9.13%9.8%
Max drawdown50%55%

Warren Buffett ETF Portfolio (90/10) backtest 2: SPY and IEI

Let’s continue with SPY and IEI:

Warren BuffetPortfolio 90/10 example

The red line shows SPY (buy and hold), while the blue line is 10% allocated to IEI and 90% to SPY. As expected, it performs slightly worse compared to SPY (but slightly better than with SHY):

90% SPY and 10% IEIBuy and hold SPY
CAGR9.22%9.8%
Max drawdown50%55%

Warren Buffett ETF Portfolio (90/10) backtest 3: SPY and TLT

Let’s finish with SPY and TLT:

Warren Buffett Portfolio 90/10 backtest

The red line shows SPY (buy and hold), while the blue line is 10% allocated to TLT and 90% to SPY. The portfolio performs better than the two others and is almost at par with SPY.

90% SPY and 10% TLTBuy and hold SPY
CAGR9.62%9.8%
Max drawdown50%55%

Conclusion

The backtests show that you are compensated for taking the extra risk with longer maturities (as expected). Also, by adding TLT, you have most of the time performed better than allocating 100% to SPY. The reason for the underperformance was the abysmal bond market in 2022.

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FAQ:

Why choose the 90/10 allocation for the Warren Buffett ETF Portfolio?

The Warren Buffett ETF Portfolio (90/10) is an investment strategy inspired by Warren Buffett’s philosophy. It involves allocating 90% of funds to low-cost, passively managed S&P 500 index ETFs and 10% to government bonds, aiming for long-term growth with reduced risk and lower fees. The 90/10 allocation is chosen to capture the potential growth of the stock market (90% in S&P 500 ETFs) while providing a cushion against market volatility (10% in government bonds).

What is the purpose of the S&P 500 index in the Warren Buffett ETF Portfolio?

The S&P 500 index represents 500 large publicly traded companies, offering diversification and historically strong returns. Investing in an S&P 500 ETF provides exposure to a well-established portfolio of blue-chip companies. The 10% allocation to government bonds serves to mitigate risk. Bonds are considered less volatile than stocks, and government bonds, being backed by the government, are considered a safer form of debt.

What is the key principle behind the Warren Buffett ETF Investment Strategy?

The key principle is a passive investment approach, focusing on low-cost, passively managed ETFs that track major stock market indices like the S&P 500. It emphasizes long-term growth and avoids overactive trading and high fees. The performance has been generally positive, closely following the S&P 500 index. However, past performance is not indicative of future results, and various factors can impact the portfolio, including market conditions and economic changes.

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